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PROJECT CONTRACT MANAGEMENT

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 ATALANTIC INTERNATIONAL
UNIVERSITY

PROJECT CONTRACT MANAGEMENT

CONTRACTUAL MANAGEMENT IS A COMPLEX BUT
STRATEGIC ISSUE. AS SUCH, MANY CONCERNS, DEBATES
AND QUESTIONS ARE REGULARLY RAISED ON THIS
SUBJECT, SPECIFICALLY ON HOW TO ENSURE ITS
EFFICIENCY

BY: Eng Ssempebwa Kibuuka Ronald

Supervisor: Dr Rosa Hilda Lora M

Atlantic International University
U.S.A

This Is Presented In Fulfillment For The Requirements For A Masters Degree In

Project Management
 PROJECT CONTRACTS MANAGEMENT
BY Eng Ssempebwa Kibuuka Ronald

ATLANTIC INTERNATIONAL UNIVERSITY

INTRODUCTION; Management in businesses and organizations is the function that

coordinates the efforts of people to accomplish goals and objectives using available resources
efficiently and effectively. Management includes planning, organizing, staffing, leading or
directing, and controlling an organization to accomplish the goal. [Wikipedia]

Management is often included as a factor of production along with‚ machines, materials,

and money. According to the management guru Peter Drucker [1909-2005], the basic task of
management includes both marketing and innovation. Practice of modern management originates
from the 16th century study of low-efficiency and failures of certain enterprises, conducted by
the English statesman Sir Thomas More [1478-1535]. Management consists of the interlocking
functions of creating corporate policy and organizing, planning, controlling, and directing an
organization's resources in order to achieve the objectives of that policy.

The directors and managers who have the power and responsibility to make decisions and
oversee an enterprise are called management. The size of management can range from one
person in a small organization to hundreds or thousands of managers in multinational companies.
In large organizations, the board of directors defines the policy which is then carried out by the
chief executive officer, or CEO. Some people agree that in order to evaluate a company's current
and future worth, the most important factors are the quality and experience of the managers.
[http://www.businessdictionary.com/definition/management]

According to the oxford dictionary; a contract is a written or spoken agreement,

especially one concerning employment, sales, or tenancy that is intended to be enforceable by
law.

Establishing the form of contract; Contracts can range from a single, ad hoc agreement
for the provision of a product or service of relatively low monetary value, requiring little more
than a short term, formal relationship, or an overarching framework agreement, through contracts
for long term product or service contracts, to a series of contracts for large, complex construction
or leading edge research and development contracts with multi-million pound values requiring

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ATLANTIC INTERNATIONAL UNIVERSITY

the establishment of strategic partnerships and alliances. [Harvey, Revised Edition 1998]

The contract is the central element of every project activity. Contract management is
becoming an integral part of project management, and business in general. Many commercial
and project managers are more and more facing contract management issues. For projects of
all types different contracts will be structured, negotiated, concluded and fulfilled. On the one
side, we deal with the management of contractual relationships, on the other with the
contracts and their management. [Contract management Guide, Republic of South Africa 2010]

Contract life cycle management “is the process of systematically and efficiently
managing contract creation, execution and analysis for maximizing operational and financial
performance and minimizing risk”. Contract management is based on the following service
modules and can be individually supplemented: commencement of contract negotiations,
contract drafting, contract negotiations and contract implementation. Within the framework of
the commencement of contract negotiations the essential information for the contract will be
structured, analyzed and appraised, taking into account the suitable choice of business
operating mode. We specify the necessary services and participate in the selection of your
potential contractual partner. [Contract Life-Cycle Management – open Source CM, 2012]

Contract drafting covers the configuration of the contractual relationship. In terms of

risk distribution, the contract- relevant factors will be analyzed and appraised. Contract
negotiation should lead to the conclusion of a contract with a potential partner. During
contract implementation, there has to be monitoring of the fulfillment of the contract
from the technical, timetabling, manning or financial perspective and implementation of
the necessary measures. In this way there is accomplishment of on targeted compliance with
the agreements and obligations “there in” the contract. [Contract Life-Cycle Management –
open Source CM, 2012]

There are several very typical and easily identifiable steps related to contract
management development within a company. The first step is simply to get the basic contract

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BY Eng Ssempebwa Kibuuka Ronald

ATLANTIC INTERNATIONAL UNIVERSITY

management operations established. These include such things as a centralized contract
repository, appointment of person(s) responsible for each contract, a contract management
handbook, company contract templates and defining required proactive alarms on the
contracts. [HMSO, 2002]

The second step is to make the contracts “alive” – in other words, be part of the
business. This covers issues such as contract management process, deeper involvement of
business units, use of contracts in operations such as project management, and truly active
use of contract management as a business tool. Finally, the third step in the process of contract
management is the strategic step. As this level of development is reached your organization
is able to evaluate entire organizations’ contract and partnership network from a strategic point
of view. This final phase genuinely integrates contract management as a valuable tool for
long-term planning, strategy formulation, and strategy implementation. [HMSO, 2002]

Before getting started with contract management of projects, there are several
considerations to be made. The most important consideration is resource allocation. For a
contract management project, as for any project, it is essential to have top management
commitment on resources, goals, and schedule. Another important step is the nomination of
project manager for contract management. Naturally, the goals and the schedule should be in
line with the resources as well as the other way around. Once these basic preparations have
been done, the project is set to get started. [HMSO, 2002]

All contracts are predicated on the need to obtain management commitment and approval
at the appropriate level. This involves the formulation of a sound business case aligned to the
organization’s corporate and functional strategies. The business case sets out the policy, business
and contract objectives and the issues that affect the decision and the investment. It should seek
to establish that the proposed contract will meet the need that it is achievable and affordable, and
it should address the following issues: [Aberdeen Group, 2004]

1. The outcome(s) of the contract

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ATLANTIC INTERNATIONAL UNIVERSITY

2. Critical success factors

3. The possible alternatives, including existing contracts

4. The risks including the extent and where they may fall

5. Identification of any contingent needs and ramifications of proceeding

6. Time scale.

The business case should be prepared with the involvement of the stakeholders,
including where and if possible, the end users. It should be signed off by the sponsor or patron.
The business case is a working document and should form the basis of the post-
implementation review and used as a management tool to ensure that the original outcomes
and benefits have been achieved. [Aberdeen Group, 2004]

Contract management is in the core of running competitive enterprise whether it is a

private or a public. Business environment is getting more complicated and so are the laws. In
the past contracts needed only to deal with the laws in one country. Nowadays international
trade laws, EU laws etc. have to be taken into account. On the other hand the creation of
enterprise value is ever-increasingly dependent on a network of suppliers, business partners
and other stakeholders. This changes operational risks into contract risks which are easily
outside the control and audition of management team. This risk to enterprise value is even
increased by the fact that customers are becoming more aware of their rights and
responsibilities, thus demanding and negotiating better contracts for themselves. [European
Community Supplies Directives, 2007]

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ATLANTIC INTERNATIONAL UNIVERSITY

THESIS; Contractual Management is a complex but strategic issue. As such, many
concerns, debates and questions are regularly raised on this subject, specifically on how to ensure
its efficiency. Keeping this in mind, I decided to write an essay entitled “Contract Management:
Challenges and Practical Solutions”.

Organizations in both the public and private sectors are facing increasing pressure to
reduce costs and improve financial and operational performance. New regulatory requirements,
globalization, increases in contract volumes and complexity have resulted in an increasing
recognition of the importance and benefits of effective contract management.

The growing recognition of the need to automate and improve contractual processes and
satisfy increasing compliance and analytical needs has also led to an increase in the adoption of
more formal and structured contract management procedures and an increase in the availability
of software applications designed to address these needs.

It is worthwhile noting that contract management is successful if: [Singleton &

Burnett, 1997]

1. The arrangements for service delivery continue to be satisfactory to both

parties, and the expected business benefits and value for money are being
realized

2. The expected business benefits and value for money are being achieved

3. The supplier is co-operative and responsive

4. The organization understands its obligations under the contract

5. There are no disputes

6. There are no surprises

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ATLANTIC INTERNATIONAL UNIVERSITY

7. A professional and objective debate over changes and issues arising can be
had

8. Efficiencies are being realized.

There are challenges that pertain to just about every area of Managing contracts, whether,
they originate internally or externally, is no different. Companies that develop and maintain
contracts with multiple parties, face many challenges that impact the effectiveness of their
contract management processes.

BODY; There are several challenges pertaining to contract management that can be
difficult to overcome without proper Contract Management tools. Here are a few of the more
prominent potential difficulties:

One of the challenges is often how to get started with contract management. The
process of preparing and launching of contract management in an organization can take years.
This kind of a process should be seen as an on-going multi-step process instead of a project
that can be completed in less than a year. However, contract management development is
beneficial and even crucial. The good news is that after each completed sub-project contract
management results in cost savings and increased profits. As contract management concept
is extended to the entire organization in its’ widest and purest form it will be an essential
competitive edge. [Contract Life-Cycle Management – open Source CM, 2012]
.
Today’s business models are driving the complexity of contracts, their terms and
conditions. Similarly the number of contracts is rapidly increasing. The way contracts are
managed must be changed. Managing contracts manually and in an ad-hoc manner is
resulting in higher risks and costs. Additionally lack of clear executive ownership of contract
management issues is one of the major reasons for operational weaknesses. [Contract Life-
Cycle Management – open Source CM, 2012]

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BY Eng Ssempebwa Kibuuka Ronald

ATLANTIC INTERNATIONAL UNIVERSITY

Tracking global contracts: Suppose your organization either has geographically
dispersed offices or you conduct business internationally. A number of factors, ranging from
differences in language and how words are interpreted, to unique business practices can
complicate global contracts, making it difficult to ensure that sufficient understanding is
established between parties. While today’s contract negotiations rarely happen in person,
global contracts almost never happen in person, making clear understanding essential. It can
also be difficult to share data between parties on opposite ends of the earth. While email
communications have become the standard means of communication for most companies, it
does not prevent the wrong version of documents from being reviewed, nor does it adequately
control or track contract review status or workflow, both essential to good contract
management. [Aberdeen Group, 2004]

Measuring contract performance: Businesses need to know if their contractual

obligations are being followed and deadlines are being met. Contract leakage is a real concern
that can occur if individuals, obligated to act upon the detailed obligations in a contract, are
unaware of the specifics of their agreement. While a manager may fully understand a
contract’s details at the time of execution, remembering obligations months later is another
matter entirely. Without a structured way to identify contract events and tie them to a calendar
or to reminders that prompt action, missed deadlines, potential penalties and missed
incremental revenue opportunities can become the norm. [Aberdeen Group, 2004]

Managing scattered data: If data is contained in different locations, it can be difficult to

locate and to associate one document to another. This can create problems if you need to review
multiple documents pertaining to a certain contract (amendments), or review different versions
of the same document, and they are not together. Even if documents are digitized, if they are in
different environments they can be difficult to locate or to access. [Contract Life-Cycle
Management – open Source CM, 2012]

There is need to assemble heterogeneous team in skills and a homogeneous team in

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BY Eng Ssempebwa Kibuuka Ronald

ATLANTIC INTERNATIONAL UNIVERSITY

corporation and team work. This is a major contracts management challenge in most of the
organization most especially when it come to the implementation of the contracts. The need to
assemble a team to manage a contractual procurement programme will be determined not only
by the scale, nature, complexity and significance of the procurement and the necessary skills
and experience but also by the extent to which it is considered appropriate, beneficial or a
requirement to comply with organizational policy to involve stakeholders in the project. In
addition to the need to identify the necessary technical skills, knowledge and experience with
the appropriate level of authority required of the members of the team, the importance of the
ability of team members to work together effectively and the significance of the role of the
project leader should be recognized. [Singleton & Burnett, 1997]

Luck of contractual risk assessment; Contractual risk analysis is the process of

identifying all the potential issues that can go wrong with the contract period and then
estimating the probability of each happening. It should form part of any significant contract
management process and is a fundamental part of determining the contract strategy. The process
can range from a simple listing of risks on an informal, intuitive basis to a formal process
involving set procedures and working with other professional disciplines in brainstorming and
technically and financially evaluating potential risks. However many companies under estimate
this factor because they are anxious and desperate to crack the deal, and this has resulted into
many future losses for many stake holders. [Singleton & Burnett, 1997]

In addressing the fundamentally important issue of risk in contract management, the

purchasing professional should adopt a continuous “what if” mentality throughout the
procurement of products and services. Risk management requires a professional who possesses
knowledge of techniques, an analytical mind set, objectivity and a knowledge and thorough
understanding of their organization’s business and the market. It is advisable to seek to mitigate
and remove risk whenever possible before contract award. [Singleton & Burnett, 1997]

Whilst many of these sets of circumstances are generally predictable, and “standard”

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BY Eng Ssempebwa Kibuuka Ronald

ATLANTIC INTERNATIONAL UNIVERSITY

terms and conditions are widely included in contracts today, it does not detract from the need to
carry out this aspect of risk assessment and to ensure that clear and comprehensive terms and
conditions are drawn up which address the identified circumstances and the rights and
responsibilities of the parties and the means by which any damages or costs may be mitigated are
set out. This latter should include the method by which the goods or services may continue to be
provided and, if possible, seamlessly transferred to another supplier or contractor to ensure
business continuity. It is also important to clarify any notice period to be given and any timescale
constraints associated with the exit process itself. [Paul Richards (Fourth Edition 1999]

Developing contract exit strategy; a contract will conclude when both parties have
satisfactorily fulfilled their responsibilities under the terms of the contract. This, for example,
will occur when the goods or services have been supplied and payment made and/or at the end of
a pre-agreed period of time. This situation, however, does not remove the need to develop a
contract exit strategy as part of the process of risk identification and reduction, and reinforces the
importance of establishing the foundations of sound contract management. It is important to
identify the circumstances under which early contract exit may be required or indeed desired,
may be when there is a major default by your organization; this may include contractual breaches
or changed circumstances - market, political ,economic, funding resulting in major procurement
need changes, financial resulting in non-payment of supplier’s invoices etc.[Handy ,Fourth
Edition 1993]

Developing a contract management plan during pre-contract award stages, it is normal

for time to be devoted to the preparation of the business case, drafting specifications and tender
documents selecting potential suppliers, and so on. However, time and effort must also be spent
on determining how the contract will work once it has been awarded. The importance of contract
management has already been mentioned and it is vital that a contract management plan is
drawn up in advance of contract award. This should set out how the obligations of all the parties
should be carried out effectively and efficiently. [Handy, Fourth Edition 1993],

A specification is also known as an operational requirement or a statement of

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 PROJECT CONTRACTS MANAGEMENT
BY Eng Ssempebwa Kibuuka Ronald

ATLANTIC INTERNATIONAL UNIVERSITY

requirement. It can take the form of a conformance specification; where the organization sets out
how the supplier should meet its needs or a performance or output based specification where the
supplier is given scope to propose solutions to an expected and known end result. Although the
drawing up of specifications in the majority of large organizations is not the responsibility solely
of the buyer, nevertheless it should be emphasized that the successful drafting of specifications
is one of the most important responsibilities of a professional purchasing officer. Drafting
specifications and requirements; A specification is a statement of needs and its purpose is to
present to potential suppliers a clear, accurate and comprehensive statement of the
organization’s needs in order that they can propose solutions to those needs.[Lysons &
Gillingham,Sixth Edition 2003]

Post-award management of longer term, high value and complex contracts can be
categorized as service delivery management, relationship management and administration. The
form and content of the contract document should therefore also be determined by the balance
and significance required by each of these aspects of the post-award management. However; the
foundations for effective and successful post-award contract management rely upon careful,
comprehensive and thorough implementation of the upstream or pre-award activities. During the
pre-award stages, the emphasis should be focused on why the contract is being established and
on whether the supplier will be able to deliver in service and technical terms. However, careful
consideration must be given to how the contract will work once it has been awarded. The
organization’s high-level requirements should be carefully researched so that there is clarity of
purpose from the outset. This will help to ensure clarity in all aspects of the procurement process.

Establishing the pre-qualification, qualification & tendering procedures; evaluating the

suitability of potential suppliers to meet the commercial requirements of the organization is
normally undertaken via a pre-qualification system. This is the most efficient method of
assessing suitability to meet the required criteria and is carried out prior to inviting them to
tender. In large, complex contracts of long duration it is important to determine firstly, whether
or not the organization will adopt a pre-qualification system, determine the qualifications or
criteria and concurrently decide the tendering procedures. , [Handy ,Fourth Edition 1993]

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 PROJECT CONTRACTS MANAGEMENT
BY Eng Ssempebwa Kibuuka Ronald

ATLANTIC INTERNATIONAL UNIVERSITY

However, while it's true that proper contract management can be a challenging endeavor,
it can be made easier. Using a good contract management system, contract stake holders can
accurately identify and track contract obligations, deliverables and key events with contract
tracking calendars and automated email reminders. This minimizes contract leakage, particularly
when dealing with thousands or tens of thousands of contracts, each with many obligations that
must be honored.

However, due to cloud-based contract management, documents are managed in a central

repository, contract managers do not have to concern themselves with locating specific or related
documents because they are maintained in the same place in the cloud. Secure access is provided
from any Internet location and a good contract management system will identify how each
document relates to other documents with which it is associated. Everything is searchable and
well organized. By giving stakeholders access rights to the documentation that only pertains to
them, they can easily monitor and track progress and performance. Obtaining real-time
information allows for actions that avoid potential problems that could impact the fulfillment of
contractual obligations. [Lysons & Gillingham, Sixth Edition 2003]

Another important consideration in establishing contract strategy is whether to utilize

Service Level Agreements (SLA). SLAs are negotiated agreements designed to create a common
understanding about services, priorities and responsibilities and are applicable in two situations.
Firstly, internally used and provided specialist support services and secondly when outsourcing.
Internal SLAs are not intended to have legal consequences since the customer and the supplier
are part of the same legal entity which cannot sue itself, and normally there will be no direct
financial compensation. External SLAs such as those for bought-in or outsourced services may
have contractual implications. They are generally a schedule or part of a schedule to the buy-in
or outsource agreement customers have a greater awareness of the services received and the
additional services that can be provided. [Harvey, Revised Edition, 1998]

However, the purpose of SLAs and setting service levels is to enable the customer to
monitor and control the performance of the service received from the supplier against agreed

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ATLANTIC INTERNATIONAL UNIVERSITY

standards. It should be understood that service levels should be agreed and benchmarked for
both customers and suppliers and should be: established at a reasonable level; if they are set too
they will attract additional charges from the supplier. There are advantages and disadvantages in
using SLAs. Among the advantages are: [Harvey, Revised Edition, 1998]

1. The service providers and the customers are clearly identified

2. Attention is focused on what a service actually does as opposed to a belief

CONCLUSIONL; Organizations in both the public and private sectors are facing
increasing pressure to reduce costs and improve financial and operational performance. New
regulatory requirements, globalization, increases in contract volumes and complexity have
resulted in an increasing recognition of the importance and benefits of effective contract
management.

The growing recognition of the need to automate and improve contractual processes and
satisfy increasing compliance and analytical needs has also led to an increase in the adoption of
more formal and structured contract management procedures and an increase in the availability
of software applications designed to address these needs.
It is important that the performance measures selected and set out in the contract offer
clear and demonstrable evidence of the success (or otherwise) of the relationship. Once chosen,
the requirements underpinning the performance measures should be the primary focus for
contract management. They should provide the framework around which provider information
requirements and flows, contract management teams, skills, processes and activities are
developed.
It is worth reiterating that the foundations for successful contract management post-
contract award are laid down in these stages and thus the aspects of clarity and
comprehensiveness are extremely important in determining the form and content of the contract
document.

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BY Eng Ssempebwa Kibuuka Ronald

ATLANTIC INTERNATIONAL UNIVERSITY

Contract management success factors, the conditions that should be met if a contract is
to be managed successfully, are:
1. The arrangements for service delivery continue to be satisfactory to both
customer and provider

2. Expected business benefits and value for money are being realized

3. The provider is co-operative and responsive

4. The customer knows its obligations under the contract

5. There are no disputes

6. There are no surprises

7. Satisfactory delivery progress is demonstrable.

In addition to these success conditions, it is worthwhile noting the foundations of

successful contract management and the need for preparing a management plan:

1. The need for flexibility by the contracting parties, particularly in

partnership agreements

2. A willingness to adapt the terms of the contract to reflect change and

unforeseen problems.
Although the risk assessment process mentioned earlier may be carried out thoroughly
and professionally, problems are still likely to arise during the contract period like;

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ATLANTIC INTERNATIONAL UNIVERSITY

1. The need to have clear business objectives, coupled with a clear
understanding of why the contract will contribute to the business objectives
and the need to understand the provider's business objectives.

2. The ability to recognize and obtain senior management agreement to the

need for the service provider to achieve their objectives

3. The need for people with the right commercial, interpersonal and
management skills to manage these relationships on a peer-to-peer basis and
at multiple levels in the organization.

4. To recognize that all parties need managers who can manage upwards in
their organization and persuade their boards to make decisions for the
benefit of the relationship.

REFERENCE

1. www.Wikipedia.com

2. HMSO, Licensing Division, St Clements House, 2-16 Colegate, Norwich, NR3 1BQ Tel
No (01603) 621000© Crown Copyright 2002

3. Contract Life-Cycle Management – open Source CM, 2012

4. Contract management Guide, Republic of South Africa 2010

(http://www.businessdictionary.com/definition/management)

5. Best Practices in Contract Management – Strategies for Optimizing Business

Relationships (2004), Aberdeen Group

6. A professional guide to contracting including model conditions, A D Allwright & R W

Oliver. Revised by E S Singleton & K R Burnett (1997),

7. European Community Supplies Directives - A guide for the Public Sector Fraud – 2007

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ATLANTIC INTERNATIONAL UNIVERSITY

8. F Harvey (Revised Edition 1998), CIPS Law of Contract, Paul Richards (Fourth
Edition 1999), Pearson Education

9. Understanding Organizations, Charles Handy (Fourth Edition 1993), Penguin Risk

Management in Purchasing & Supply Management - Positions on Practice, CIPS

10. Project Management Dennis Lock (Eighth Edition 2003), Gower Purchasing & Supply
Chain

11. Management, Kenneth Lysons & Michael Gillingham (Sixth Edition 2003) Pearson
Education

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